Market Overview
The rally on the dollar is showing signs of life again after a brief pause for Presidents Day on Monday. As traders look ahead to the FOMC meeting minutes on Wednesday that could give further clues to an hawkish leaning FOMC, the yield on US Treasuries are beginning to pick up again helping to strengthen the dollar. This dollar improvement is coming as the demand for safe havens such as gold and the yen has tempered slightly but also as traders begin to shun the euro once more. The prospects of Marine Le Pen in the French Presidential election seem to be a factor in the euro weakness. There seems to be a correlation between the prospects of “Marine” in the polls and the spread on French over German bond yields, which feeds into the outlook for the euro. This all adds up to the Trade Weighted Dollar Index pulling higher once more, back above 101, which had previously been a resistance, so the bulls will be gaining in confidence again.
Wall Street was closed for Presidents Day, so it is down to the Asian markets to give a steer, with a generally positive session (Nikkei +0.7%, helped by a weaker yen). European markets are though looking more circumspect today and are mixed in early moves. Forex markets show that the dollar is stronger across the major pairs, with no real standout underperformer. This dollar strength is helping to pull gold and silver back lower again, whilst oil is holding on to yesterday’s mild gains.
Traders will be watching out for the Eurozone flash PMIs during the early part of today’s session, culminating in the Eurozone regional data at 0900GMT with the Eurozone flash Composite PMI expected to be 54.3. Bank of England Governor Mark Carney testifies before the Treasury Committee for the quarterly inflation report at 1000GMT and sterling is likely to be reactive. The dollar will also be moving on the US flash Manufacturing PMI at 1445GMT which is expected to dip slightly to 54.7 (from 55.0), with the US flash Services PMI expected to improve marginally to 55.8 (from 55.6). There are also a couple of FOMC speakers with Neel Kashkari and Patrick Harker set to speak at 1350GMT and 1700GMT respectively.
Chart of the Day – USD/ZAR
Dollar/Rand broke below a huge support last week as the market achieved a two day close below the key support at 13.200 which continues the development of the primary downtrend. This effectively completed a range breakdown for a market that had been trading sideways since last August. However the last few months have been characterised by a very well-defined downtrend that has been posting a series of lower highs as the support at 13.20 has come under increasing pressure. The momentum indicators are firmly in bearish configuration and the rallies will now be seen as a chance to sell. The past few days have seen the market embarking upon a pullback rally towards the breakdown which is now an area of considerable overhead supply. The falling trend line now means that there is an ideal “sell-zone” at 13.200/13.380. The pullback found resistance at 13.180 yesterday but there is still room for the RSI and Stochastics to unwind in the near term. Rallies tend to peter out in the mid-40s on the RSI whilst anything around 40 on Stochastics tend to limit the recovery, such is the level of the bearishness on the pair. The hourly chart shows a resistance band 13.150/13.250 but the hourly RSI has started to lose momentum already. A move back below 13.000 would complete a small head and shoulders top pattern on the hourly chart and render the rally over, re-opening the downside for a retest of 12.890. The next key support is 12.600 from mid-2015.
The market may have spent much of Monday in consolidation mode with the US on Presidents Day public holiday but the legacy of Friday’s decline still hangs over and the mild negative candle yesterday has filtered through into further selling pressure again today. This means that the old support at $1.0577 is again back under scrutiny as the Europeans take control of the session. The daily momentum indicators are all taking a negative slant once more with the Stochastics crossing lower and the MACD lines in decline. The RSI is below 50 and if there is a move below 40 this would help to confirm bear control. Despite last week’s intraday breached of $1.0577 there has as yet not been a confirmation close below, so if there is today then the sellers would again be gaining confidence. There is further support at $1.0520 before $1.0450 and $1.0340 which is key. The hourly chart reflects the negative bias with resistance in a band $1.0600/$1.0635 (yesterday’s trading range), whilst $1.0710 remains key overhead.
The selling pressure may not be precipitous but the bears are still in control of the outlook with a sequence of mild lower highs and consistent testing of support. In the course of the past two weeks the market has laid resistance down at $1.3580, $1.2550 and $1.2525, whilst now consistently trading below the pivot line of the past two months at $1.2430. The momentum indicators are all configured for a corrective move with RSI, MACD and Stochastics all slipping back. The hourly chart shows yesterday’s rally running out of steam around $1.2480 and this is now a resistance that is a marker for today’s session. The last two lows have come around $1.2380 which has become supportive, however I expect further pressure on this low, whilst a close below $1.2430 would add to the corrective outlook for a retest of $1.2345.
There is an increasingly range bound feel to Dollar/Yen developing. The old support that had held for much of January around 112.50, seems to be growing once more as the bulls have started to pull the market higher again. Yesterday’s mildly positive candle has been followed by further gains early today and this is helping to improve the momentum indicators once more. The hourly chart shows how a lower reaction high at 113.50 has now been breached overnight and the bulls will now be eying 114.00 which is the near to medium term pivot. A break back above 114.00 re-opens the upside once more for a concerted push towards the 114.95 resistance. The rally off 112.50 suggests that there is a lack of trend now.
Gold
The safe haven plays are tending to move into a ranging, consolidation phase. As with Dollar/Yen, we find that gold was unable to break through $1244.70 resistance and is just beginning to drift sideways a touch in search of direction. The momentum indicators remain positively configured on the medium term basis and this suggests an upside break is still preferred, however the momentum has become a little deflated. The candle bodies have become quite confined in the past few days and the early dip lower today seems to be continuing the undulating theme. The hourly chart shows that a break back below near term support at $1231.60 would also complete a small top pattern which would re-open the $1220 bottom of the near term range. Initial resistance today is at $1238.0. As with other of the major markets, gold is in need of a catalyst now.
WTI Oil
The market has looked to push for a positive start to the week and a near term move above $53.50 improves the prospects, however the very light trading due to Presidents Day in the US means that there needs to be confirmation of a move higher today. There is still a concern that rallies above $54.00 continue to be sold into and tend to be the upper limit of the recent trading range. Unless the daily RSI starts to push above 60 and MACD lines start to pick up there will be a concern that the bulls just do not have the momentum in the move to push higher and seriously test $55.25 key resistance. There is still a band of support around $52.70 which is a positive and there is a mild bullish bias to the range that suggests an upside break is preferred. However more confirmation is needed before pushing for a breakout at this opportunity.
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